In a decision strengthening the ability of defendants in state court class actions to remove those cases to federal court, on March 19, 2013, a unanimous U.S. Supreme Court held in Standard Fire Insurance Company v. Knowles,1 that a representative plaintiff in a class action filed in state court cannot defeat removal under the Class Action Fairness Act of 2005 (CAFA)—which permits removal of state-law based class actions to federal court if, among other things, the matter in controversy exceeds $5 million—through a stipulation that the class "will seek to recover total aggregate damages of less than" that jurisdictional threshold, regardless of the class' actual claimed damages. Building on its 2011 decision in Smith v. Bayer Corp.,2 which held that a class representative has no power to bind absent class members prior to class certification, the Supreme Court determined that the stipulation was not binding on any of the absent class and, therefore, district courts should ignore such stipulations in the future. The effect of this decision is to broaden a class action defendant's ability to invoke federal jurisdiction by eliminating a device by which class action plaintiffs sought to prevent removal.
In the Standard Fire case, Greg Knowles filed a proposed class action in the Circuit Court of Miller County, Arkansas, in April 2011, contending that when Standard Fire had made certain homeowner's insurance loss payments, it had unlawfully failed to include a general contractor fee. As part of his suit, Knowles sought to certify a class of "hundreds, and possibly thousands" of similarly harmed Arkansas policyholders. Notwithstanding the size and scope of the class proposed, Knowles stipulated that he and the class "will seek to recover total aggregate damages of less than five million dollars." Moreover, Knowles himself submitted an affidavit stating that he "will not at any time during this case . . . seek damages for the class . . . in excess of $5,000,000 in the aggregate."
After Standard Fire removed the case to federal court, Knowles argued for remand on the ground that the district court lacked jurisdiction because his stipulation demonstrated that the "sum or value" of the "amount in controversy" fell beneath CAFA's $5 million threshold. On the basis of evidence presented by the company, the district court found that that the "sum or value" of the "amount in controversy" would, in the absence of the stipulation, have fallen just above the $5 million threshold. Nonetheless, in light of Knowles' stipulation, the district court concluded that the amount fell beneath the threshold and ordered the case remanded to the state court.
Faced with this record, the Supreme Court was required to decide "whether the stipulation makes a critical difference" in determining the "sum or value" of the "amount in controversy." The Court determined that the stipulation made no such difference, for the "simple" reason that Knowles could not bind the other absent class members and prevent them from seeking the full amount of the class' purported damages. While the Court reaffirmed its longstanding rule that plaintiffs are the masters of their complaints and, therefore, can avoid removal to federal court by stipulating to amounts in controversy falling below the federal jurisdictional requirement,3 that is only true where those stipulations are legally binding on all plaintiffs. However, "a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified." As a consequence, Knowles' stipulation "has not reduced the value of the putative class members' claims."
Given that other members of the class did not possess the disability suffered by Knowles, the Supreme Court pointed to several potential ways in which a state court might realistically permit class recovery in excess of CAFA's jurisdictional amount. For example, the state court "might certify the class and permit the case to proceed, but only on the condition that the stipulation be excised. Or a court might find that Knowles is an inadequate representative due to the artificial cap he purports to impose on the class' recovery." Or another class member could intervene with an amended complaint (without a stipulation), and supplant Knowles as the new representative. In all events, the Supreme Court refused to hold that "CAFA forbids the federal court to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process."
Because Knowles' stipulation did "not resolve the amount-in-controversy question in light of his inability to bind the rest of the class," the district court "should have ignored" it. The Supreme Court thus returned the case to the district court for further proceedings. At that time, Knowles may make an attempt to rebut Standard Fire's evidence that the "sum or value" of the "amount in controversy" exceeded CAFA's $5 million threshold; if successful, the effort would result in a remand back to state court.
What This Case Means for Defendants in Class Actions Implicating CAFA
Since the enactment of CAFA in 2005, class action plaintiffs have fought to ensure that their cases remain in state courts that they perceive are more hospitable (so-called "magnet jurisdictions"). For instance, as the petition for certiorari in the Standard Fire case lays out, a number of pre-CAFA class actions were filed in Miller County, Arkansas; due to the briefing schedules adopted by the Circuit Court in those cases, class defendants were induced to settle rather than incur years of expensive discovery prior to decision on either the merits or class certification. Because stipulations of the kind at issue in Standard Fire do not limit the size or scope of the proposed class, these significant collateral costs will still be present, and in terrorem state court settlements of the type CAFA sought to prevent remain a significant possibility. The Supreme Court's decision in Standard Fire eliminates one method by which a class action plaintiff can mold his or her claim to achieve this goal.